BUSINESS POLICY & STRATEGY

STRATEGY FORMULATION

INTRODUCTION: Strategic Formulation is the second

phase in the strategic management process that produces a clear set of recommendations, with supporting justification, that revise as necessary the mission and objectives of the organization, and supply the strategies for accomplishing them. In formulation, we are trying to modify the current objectives and strategies in ways to make the organization more successful. This includes trying to create "sustainable" competitive advantages, although most competitive advantages are eroded steadily by the efforts of competitors.

STEPS IN STRATEGIC FORMULATION:

There are six primary steps in this phase:

i. The company or organization must first choose the business or businesses in which it wishes to engage, in other words, the corporate strategy.

ii. The company should then clear a "mission statement" consistent with its business definition.

iii. The company must develop strategic objectives or goals and set performance objectives (e.g., at least 15 percent sales growth each year).

iv. Based on its overall objectives and an analysis of both internal and external factors, the company must create a specific business or competitive strategy that will fulfill its corporate goals (e.g., pursuing a market niche strategy, being a low-cost, high-volume producer).

v. The company then implements the business strategy by taking specific steps (e.g., lowering prices, forging partnerships, entering new distribution channels).

vi. Finally, the company needs to review its strategy's effectiveness, measure its own performance, and possibly change its strategy by repeating some or all of the above steps.

ASPECTS OF STRATEGY FORMULATION: The following are three aspects or levels of

strategy formulation each with a different focus, need to be dealt with in the formulation phase of strategic management. These levels are:

i. Corporate Level Strategyii. Competitive Strategyiii. Functional Strategy

CORPORATE LEVEL STRATEGY: In this aspect of strategy, we are concerned

with broad decisions about the total organization's scope and direction. Basically, we consider what changes should be made in our growth objective and strategy for achieving it, the lines of business we are in, and how these lines of business fit together. It is useful to think of three components of corporate level strategy:

i. Growth or Directional Strategy ii. Portfolio Strategy iii. Parenting Strategy

GROWTH OBJECTIVE AND STRATEGIES:

Goals which guide decision making in a firm so that it can narrow the gap between the present and projected earnings. Some of the major strategic alternatives for each of the primary growth stances are summarized in the following three sub-sections:

Growth Strategy Stability Strategy Retrenchment Strategy

GROWTH STRATEGIES: All growth strategies are classified as: Concentration Strategies: In a Concentration Strategy

firm directs all or most of its resources a single market. There are two basic concentration strategies:

Vertical Integration: Vertical integrations strategies allow a firm to gain control over distributors, suppliers

and competitors. It consists of “Forward Integration” increased control over distributors or retailers

and “Backward Integration” increased control over firm’s suppliers.

Horizontal Integration: This strategy alternative category involves expanding the company's existing products into

other locations and/or market segments, or increasing the range of products/services offered to current markets, or a combination of both.

GROWTH STRATEGIES: Diversification Strategies: A portfolio strategy designed to

reduce exposure to risk by combining a variety of investments or investing the amount in different type

of business. It consists of: A. Related Diversification: In this alternative, a company

expands into a related industry, one having synergy with the company's existing lines of business

B. Unrelated Diversification: This major category of corporate strategy alternatives for growth involves diversifying into a line of business unrelated to the current ones.

Each of the four growth strategy categories just discussed can be carried out internally or externally, through mergers, acquisitions, and/or strategic alliances. Of course, there also

can be a mixture of internal and external actions.

STABILITY STRATEGIES: There are a number of circumstances in which the most

appropriate growth position for a company is stability, rather than growth. Following are there types:

1. Silence And Then Proceed: This stability strategy alternative may be appropriate in either of two situations: (a) the need for an opportunity to rest, digest, and consolidate after growth or (b) an uncertain or hostile environment in which it is careful to stay in a "holding pattern" until there is change in or more clarity about the future in the environment.

2. No Change: In this strategy the management hold all the changes which they want.

3. Grab Profits While You Can: In this strategy the management try to mask a failing situation by artificially supporting profits or their appearance, or otherwise trying to act as though the problems will go away.

RETRENCHMENT STRATEGIES: Retrenchment is a corporate-level strategy that seeks to

reduce the size or diversity of an organization's operations. Following are its types:

1. Turnaround: This strategy, dealing with a company in serious trouble, attempts to save or revive the company through a combination of reduction and consolidation.

2. Captive Company Strategy: This strategy involves giving up independence in exchange for some security by becoming another company's sole supplier, distributor, or a dependent subsidiary.

3. Sell Out: If a company in a weak position is unable or unlikely to succeed with a turnaround or captive company strategy, it has few choices other than to try to find a buyer and sell itself.

PORTFOLIO STRATEGIES: This second component of corporate level strategy is

concerned with making decisions about the portfolio of lines of business (LOB's) or strategic business units (SBU's), not the company's portfolio of individual products. Related to this overall criterion are such

questions as follows:

oDoes the portfolio contain enough businesses in attractive industries?oDoes it contain too many marginal businesses or question marks?oIs the proportion of mature/declining businesses so great that growth will be sluggish?oAre there some businesses that are not really needed or should be divested?

PARENTING STRATEGIES: This third component of corporate level strategy,

relevant for a multi-business company is concerned with how to allocate resources and manage capabilities and activities across the portfolio of businesses. It includes evaluating and making decisions on the following:

Priorities in allocating resources (which business units will be stressed)

What are critical success factors in each business unit, and how can the company do well on them.

Coordination of activities (e.g., horizontal strategies) and transfer of capabilities among business units

How much integration of business units is desirable?

COMPETITIVE STRATEGIES: This involves deciding how the company will compete

within each line of business (LOB) or strategic business unit (SBU). Competitive strategy can be better described by using Porter's four generic strategies.

Michael Porter has argued that a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus.

INDUSTRYFORCES

GENERICSTRATEGIES

COST LEADERSHP DIFFERENCIATION FOCUS

EntryBarriers

Ability to cut price in retaliation deters potential entrants.

Customer loyalty can discourage potential entrants.

Focusing develops core competencies that can act as an entry barrier.

BuyerPower

Ability to offer lower price to powerful buyers.

Large buyers have less power to negotiate because of few close alternatives.

Large buyers have less power to negotiate because of few alternatives.

SupplierPower

Better insulated from powerful suppliers.

Better able to pass on supplier price increases to customers.

Suppliers have power because of low volumes, but a differentiation-focused firm is better able to pass on supplier price increases.

Threat ofSubstitutes

Can use low price to defend against substitutes.

Customer's become attached to differentiating attributes, reducing threat of substitutes.

Specialized products & core competency protect against substitutes.

Rivalry Better able to compete on price.Brand loyalty to keep customers from rivals.

Rivals cannot meet differentiation-focused customer needs.

BEST-COST PROVIDER STRATEGY:

This is a strategy of trying to give customers the best cost/value combination, by incorporating key good-or-better product characteristics at a lower cost than competitors.

This strategy is a mixture or hybrid of low-price and differentiation, and targets a segment of value-conscious buyers that is usually larger than a market niche, but smaller than a broad market.

Successful implementation of this strategy requires the company to have the resources, skills, capabilities to incorporate up-scale features at lower cost than competitors.

This strategy could be attractive in markets that have both variety in buyer needs that make differentiation common and where large numbers of buyers are sensitive to both price and value.

COMPETITIVE TACTICS:

These are some of the tactics which are mostly used:

Frontal Assault Flanking Maneuver Encirclement Bypass Attack Guerrilla Warfare Raise Structural Barriers Increase Expected Retaliation Reduce Inducement for Attacks

COOPERATIVE STRATEGY IS A IS A STRATEGY IN WHICH FIRMS WORK STRATEGY IN WHICH FIRMS WORK TOGETHER TO ACHIEVE A SHARED TOGETHER TO ACHIEVE A SHARED OBJECTIVE.OBJECTIVE.

Strategic Alliance

Combined

ResourcesCapabilities

Core Competencies

ResourcesCapabilities

Core Competencies

A B

Mutual interests in designing, manufacturing,or distributing goods or services

1. Joint venture

2. Equity Alliance

3. Non-equity Alliance

FUNCTIONAL STRATEGIES: Functional strategies means strategies within the department

of organizations. These more localized and shorter-horizon strategies deal with how each functional area and unit will carry out its functional activities to be effective and maximize resource productivity.

Functional strategies are relatively short-term activities that each functional area within a company will carry out to implement the broader, longer-term corporate level and business level strategies. Each functional area has a number of strategy choices that interact with and must be consistent with the overall company strategies. Types of Functional Strategies are:

Marketing Strategy Financial Strategy Research & Development Strategy Procurement Strategy